Sensex Opens Higher; FMCG and Energy Stocks Gain

Mon, 3 Jun 09:30 am

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Asian share markets are lower today as Chinese and Hong Kong shares fall. The Shanghai Composite is off 0.5% while the Hang Seng is down 0.4%. The Nikkei 225 is trading down by 1.2%. US stocks dropped on Friday, as the S&P 500 closed out the month with its biggest May slump since 2010, after President Donald Trump's surprise threat of tariffs on Mexico fueled fears that a trade war on multiple fronts could lead to a recession.

Back home, India share markets opened higher. The BSE Sensex is trading up by 142 points while the NSE Nifty is trading up by 25 points. Both, the BSE Mid Cap index and BSE Small Cap index opened on a flat note.

Sectoral indices have opened the day on a mixed note with FMCG and oil & gas stocks leading the gainers. IT stocks and automobiles stocks have opened the day in red.

The rupee is currently trading at 69.55 against the US$.

Speaking of Indian benchmark indices, note that overall, the Sensex PE ratio has been in expansion mode over the last five years.

Between the election results of 2014 and 2019, the Sensex PE expanded by 52%.

The chart below shows the change in the Sensex price to earnings (PE) multiple over the last five years of Modi government.

Sensex Rally Driven by PE Expansion in Modi's First Term

What this means is that most of the gains in Modi's first term have come mostly from an expansion of valuation multiples and only partially due to earnings growth.

What are the implications for investors in Modi's second term?

Ankit Shah answers this question in one of the latest edition of The 5 Minute WrapUp. Here's an excerpt of what he wrote...

• In my view, what worked in Modi's first term may not necessarily work in the second one. Back in 2014, you could have put your finger on a random set of stocks, and there were good chances you would make money.
  
  But right now, the circumstances are quite different. The overall markets are trading at elevated valuation multiples. The economy has been showing signs of fatigue. The financial sector is still in a mess. Unemployment levels are high.
  
  For much of Modi's first term, the global markets were in a bull run. However, global economic conditions are not as favourable now. There are growing fears of an impending global slowdown. There has been an escalation in the US-China trade war.
  
  Given all these factors, do not expect the markets to have a broad-based bull run in Modi's second term.

With the elections done, the markets will now move based on earnings visibility, economic policies, global sentiments, and so on.

So, look out for the stocks that will rise fast when the tide of the market turns up.

In the news from the economy. India's gross domestic product (GDP) grew 5.8% in January-March, confirming fears of a slowdown, as the new government assumed office amid expectations of a wide-ranging policy impetus to turnaround the economy that is nursing multiple pain points.

"Real" or inflation-adjusted GDP grew 6.8% in FY19, lower than previous year's 7.2%, data released by the Central Statistics Office (CSO) showed.

The growth in GDP was slowest since FY15.

Slowdown signs have been visible since last year, with GDP growing 6.6% in October-December 2018.

The national income data have reinforced deceleration signs that were emanating from a slew of shop-end data, such as car and consumer goods sales, often seen as proxy indicators to gauge trends in household spending.

Fourth quarter corporate results have also shown a slowdown in profit growth across sectors. People are buying fewer cars and domestic sales, production and export of automobiles reflected this deceleration.

Similarly, growth in fast moving consumer goods (FMCG) have also slowed down considerably in recent quarters, mirrored in slowing sales of consumer staples, such as biscuits, soaps, oil.

One of the first tasks of the new government will be to usher in policies to boost people's spending, buoy demand. This, in turn, will prompt companies to investment more, add capacities to meet growing demand, and eventually, hire more people.

The new government will present its first central budget in the first fortnight of July 2019, amid heightened expectations that it will offer tax breaks to individuals and households, giving them more money to spend and save.

National income data showed that gross value added (GVA), which is GDP minus taxes, grew 5.7% in January-March 2019. It was 7.9% in the same quarter last year and 6.3% in October-December 2018.

GVA during FY19 grew 6.6% while it was 6.9% in FY18. GVA is a considered to be a more realistic proxy to measure economic activity.

The manufacturing sector grew 3.1% in January-March 2019, from 9.5% in the same quarter last year. For the whole year, the manufacturing sector stood at 6.9% in FY19 from 5.9% in FY18.

Factory output measured by the index of industrial production (IIP) contracted in March 2019, the first time in 21 months. This shows declining momentum of both investment and consumption.

Even core industries productions of steel, electricity, coal and cement are falling or have been stagnant in recent quarters.

The agriculture sector, which has been hit by falling farm produce prices and flat income growth, stood at -0.1% in January-March 2019 and 2.9% in FY19.

Over the last two years, farmers have been protesting in several states, demanding better prices and debt write-offs. Low retail prices may be heartening to consumers, but persistently low food prices, have meant that farmers' income have remained flat.

India's long slowdown in food prices may well be symptomatic of a problem of abundance. Low growth in farmers' income has been attributed to the BJP's loss in the Assembly elections of December 2018, particularly in Madhya Pradesh.

Procurement is taking place at higher prices only for 14 cereals by government agencies such as the Food Corporation of India (FCI). Vegetables, potatoes and onions however, are not procured by government agencies. That's why vegetable prices have crashed in wake of a plentiful harvest, the reports noted.

The new government has to quickly move on policies to raise farm incomes and also ensuring that retail inflation remains within the central bank's tolerable level of 4%.

Moving on to the news from the automobiles sector. Base effect, along with high finance cost and liquidity constraints continued to subdue automobile sales in May.

According to the reports, subdued consumer sentiment and the just concluded general election also had a major part in sales slowdown.

On Saturday, automobile major Maruti Suzuki India said its overall sales including that to original equipment manufacturer (OEM) for May declined by 22% to 134,641 units from 172,512 units' off-take recorded during the corresponding period of the last year.

The company's domestic sales (including to OEM) decreased 23.1% on a year-on-year basis to 125,552 units in May.

The automobile major's exports slipped 2.4% in May to 9,089 units from 9,312 units which were shipped out during the corresponding month of last fiscal.

On its part, Tata Motors reported a drop of 26% in its domestic sales in May 2019 at 40,155 units as against 54,290 units sold in May 2018, as market sentiments continued to be muted.

The company's sales from exports in May 2019 was at 1,563 units, lower by 58% over last May.

Reportedly, several factors like drop in retails in Bangladesh and Nepal, high stocks in SAARC region and slump in Middle East have affected the overall industry volumes in these markets.

Another automobile major Mahindra & Mahindra (M&M) reported a 3% fall in its overall sales to 45,421 vehicles in May as against 46,848 units sold in the year-ago month.

Automobile stocks opened the day on mixed note with Tata Motors and Escorts leading the losers.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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